Transcontinental Realty Investors, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars; millions are identified as such.
Business context
TCI acquires, develops and operates residential and commercial real estate and land. At year-end, its directly owned portfolio included 10 apartment communities with 1,657 units, seven commercial properties totaling approximately 1.70 million square feet, and about 1,951 acres of land. Its 50%-owned Victory Abode Apartments (VAA) joint venture held 51 apartment communities totaling 9,888 units. TCI is externally advised by Pillar Income Asset Management and has no employees. American Realty Investors and its subsidiaries own a controlling interest in TCI.
Financial performance and position
- Revenue: Rental and other property revenue was $48.0 million, down from $121.0 million in 2018. The principal reason was the November 2018 contribution of apartment properties to VAA: their revenues are no longer consolidated, and TCI instead records its share of VAA’s results under the equity method.
- Operating results: Operating loss was $7.7 million, compared with operating income of $16.1 million in 2018. Net loss attributable to TCI was $26.9 million, or $3.09 per share, versus net income of $181.5 million, or $20.71 per share, in 2018. The prior-year result included a $154.1 million gain on forming VAA.
- Notable items: 2019 included $14.9 million of land-sale gains, a $15.1 million foreign-currency transaction loss on shekel-denominated bonds, and a $5.2 million debt-extinguishment loss related to repaying commercial mortgage debt. TCI also reported a $2.8 million equity-method loss from VAA.
- Cash flow: Cash used in operations was $35.7 million; cash used in investing was $9.6 million; and financing provided $22.0 million. Cash and cash equivalents were $51.2 million, with restricted cash of $32.1 million, for total cash and restricted cash of $83.3 million.
- Debt and liquidity: Year-end notes payable principal was $253.1 million and bond principal was $233.0 million. The risk-factor discussion separately describes total indebtedness of approximately $493.3 million; these figures do not reconcile clearly in the provided filing text and merit verification. Contractual payments of notes and bonds, including interest, totaled $610.8 million, including $73.9 million due in 2020 and $162.3 million in 2023. The company reported $3.9 million of variable-rate notes and a 4.9% weighted-average interest rate on notes payable. The auditor highlighted management’s plans to sell assets and refinance or extend debt to meet liquidity needs.
- Equity and distributions: Total shareholders’ equity was $354.1 million, down from $380.4 million; book value was $40.61 per share. No common dividends were declared in 2019, 2018 or 2017.
Material changes versus 2018
- Revenue and property expenses fell substantially following the VAA transaction and deconsolidation of contributed apartments. The shift makes year-over-year operating comparisons less directly comparable.
- Interest expense decreased to $31.8 million from $58.9 million, primarily reflecting debt transferred with the VAA properties.
- Results swung from 2018’s large VAA formation gain to a 2019 net loss. The 2019 loss also reflected currency losses and the mortgage prepayment-related extinguishment charge.
- Southern Properties Capital issued approximately $78.1 million of Series C bonds in 2019 at 4.65% annual interest, with principal due in 2023. Proceeds were used in part to repay $41.5 million of mortgage debt.
- TCI sold 105.1 acres of land for approximately $30.0 million and recorded $14.9 million in gains. It invested in apartment development and reported five projects in development in its business discussion.
Outlook, risks and unusual matters
- Management expects operating cash and collections of notes and interest receivable to help meet 2020 requirements, and intends to sell land and income-producing assets, refinance or extend debt, and seek additional secured borrowings. Elsewhere, the filing cautions that excess cash from operations might not be sufficient to discharge all obligations as due. The independent auditor included an emphasis-of-liquidity paragraph.
- COVID-19 was identified as a significant uncertainty as of the March 30, 2020 filing date; the company said the potential effect on its business and results was uncertain.
- Key risks include leverage and refinancing needs, property and tenant performance, development delays and cost overruns, real-estate-market concentration, illiquidity of property, variable-rate exposure, and access to financing. The filing also notes covenant risks and land mortgages under modification or extension discussions.
- Related-party relationships are significant: TCI reported $141.5 million of receivables from related parties, including $142.1 million due from ARL as separately disclosed, and $54.0 million of notes receivable due from related entities. TCI paid Pillar $5.8 million in advisory fees and $6.7 million in cost reimbursements in 2019. TCI is also a primary guarantor of a $25.0 million mezzanine loan to related party UHF; UHF was reported in covenant compliance at year-end.
- TCI reported no real-estate impairment charges in 2019 or 2018. The financial-statement audit opinion was unqualified; management reported effective disclosure controls and internal control over financial reporting, but the auditor did not attest to internal-control effectiveness.
- Litigation disclosures include a shareholder suit alleging fiduciary breaches involving transactions with IOR; motions to dismiss remained pending after a February 2020 court ruling. TCI also reported a $19.5 million judgment against Dynex Commercial, plus accruing post-judgment interest, and said it was pursuing collection. The Clapper litigation concerns formerly owned entities; TCI stated it was not a party or obligated for its outcome.
Important facts for investors to verify
- Reconcile the filing’s approximately $493.3 million indebtedness disclosure with year-end notes and bond principal, balance-sheet carrying amounts, and the $610.8 million contractual-payment schedule.
- Assess liquidity against debt maturities—particularly 2020 and 2023—and confirm the status and terms of refinancing, extensions, asset sales, and lender covenant compliance.
- Review collectability, collateral and repayment timing for large related-party receivables, including ARL and UHF notes, and the company’s guaranty exposure.
- Evaluate VAA’s operating performance and TCI’s economic rights, cash distributions and related-party governance, given VAA’s reported 2019 net loss and TCI’s 50% interest.
- Monitor COVID-19 effects on rent collection, occupancy, property values, development activity and financing access, as the filing provided no quantified impact.
- Confirm the status and potential financial consequences of the Berger litigation and collection efforts on the Dynex judgment.